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Is Income Inequality Inevitable? (Earth 2.0 Series)

Our latest Freakonomics Radio episode is called “Is Income Inequality Inevitable? (Earth 2.0 Series)”. (You can subscribe to the podcast at Apple Podcasts or elsewhere, get the RSS feed, or listen via the media player above.)

In pursuit of a more perfect economy, we discuss the future of work; the toxic remnants of colonization; and whether giving everyone a basic income would be genius — or maybe the worst idea ever.

Below is a transcript of the episode, modified for your reading pleasure. For more information on the people and ideas in the episode, see the links at the bottom of this post. And you’ll find credits for the music in the episode noted within the transcript.

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[MUSIC: Johnny Fiasco, “Transient”]

NARRATOR: What if we could remake earth?

Megan PLUNKETT: Hey Stephen and Freakonomics! This is Megan, down in Texas.

Andrew SHORT: Hi Freakonomics, my name’s Andrew Short …

Olgalucia HERRERRA: My name is Olgalucia …

Chris ADAMSON: My name is Chris Adamson …

Paul LUNGU: Hi, my name is Paul …

Dominique BUCK: Hello, my name is Dominique Buck …

SHORT: … and I live in Atlanta.

LUNGU: I’m from Romania …

BUCK: … small town in South Africa.

NARRATOR: What would you change?

ADAMSON: One thing I’ve always wanted to reboot is how we define adulthood.

BUCK: The thing that I would like to change …

ADAMSON: … what I’d like society to do is to treat adulthood the same way it treats …

HERRERRA: What I would change …

ADAMSON: And it would force every citizen to understand their responsibilities to themselves and to society.

We like to ask questions on this program — sometimes questions that are, to be honest, unanswerable. Like today’s question: if we had the chance to totally reboot our economic system, what would that new system look like? Why do we bother with a question that may strike you as absurd? The M.I.T. economist Abhijit Banerjee says it better than I ever could:

Abhijit BANERJEE: I have no blueprint for a better world. But I think that doing things consciously with thought, asking lots of questions; not doing them because this is how we’ve always done things, this is our tradition, this is the normal in the world … Asking questions: “Why do we do these things?” “Is this the right thing to do?” “What is the actual evidence for it?” That’s key. We won’t have a blueprint for the world. But we will have a better way of building a better world.

So let’s start with a question that a lot of people are asking these days: what should be done about income inequality?

KANTER: Inequality has been proven to be a problem for economies, and it’s a problem for countries, and it’s a problem for sports teams.

That’s Rosabeth Moss Kanter of the Harvard Business School. She trained as a sociologist but is best known today as a management sage.

KANTER: One of the striking things about sports teams on losing streaks is that losing teams often had stars, just like third-world countries have rich people, even though most people are poor. Losing teams have stars, even though the team isn’t winning. The difference is that the stars look out for themselves. They feel no obligation to lift up the other players, to teach them, to include them. They only care about their own record. Rich people in an African country can take their money and go park it in Switzerland or the Cayman Islands, and not care about lifting up their country. Whereas [with] winning streaks in countries, as well as sports teams and companies, generally those at the top feel some obligation toward the education, the training, the development of people below them. To make things work well, inequality doesn’t help. If you have a lot of people who feel left out of the system, well, they do get angry, and they sometimes surprise you with their feelings. But also, they often go passive. They think nothing could be done to change anything. And because of that, they’re not very motivated, and nothing does change.

That’s a compelling argument, to be sure. But not everyone shares Kanter’s views on inequality.

CAPLAN: It’s definitely the kind of problem that we should worry a lot less about.

CAPLAN: The main predictor of living standards of not just most people but the poorest people in the country is productivity in that country. Countries that produce a lot of stuff aren’t just good places to be rich or middle class; they’re good places to be poor. So when people complain about people being left behind … China’s got 1.3 billion people. Sure, someone’s going to be left behind in there. But is it better to be poor now in China than it was 20 or 30 or 50 years ago, when people were starving to death? There is no question. It is only by going and forgetting history, forgetting comparisons, and then searching through a vast number of people to find a sad story that we can forget the big picture. What is the big picture? Not that we can find something that happened that is bad in the world so vast we can’t even imagine it, but seeing what is happening overall. What is the general trend, and how can we keep the general trend good?

DUBNER: I’d love to talk for a moment about inequality: the degree to which it is inevitable, perhaps the degree to which it is desirable, and the parts of it we should worry about, and those we shouldn’t.

DEATON: That’s a great question. I spent last week in Davos being asked nonsensical questions like, “How do we kill inequality or remove inequality?” And I’m not sure the inequality is the right concept. It has so many sides to it and so many causes and so many effect, that focusing exactly there doesn’t seem to be the right thing. In fact, I just got something from some social organization today, which said, “We define inequality as stagnant wages.” Which is a very odd definition of inequality. Inequality is about, to some extent, the dispersion. Taking it from there, there’s always going to be some inequality, at least in the world in which we live. There is this interesting fact that for most of human history, in which we were all living in hunter-gatherer bands, there appears to be no almost no inequality. Yet from farming onward, from the Neolithic revolution, there’s been a lot of inequality. Even in the perfect Rawlsian world — where you’re trying to maximize the welfare of the worst off — you would need some inequality because otherwise the worst person, like everybody else, would have nothing. That’s a simple economic story as to why there ought to be some inequality. If you go all the way back to the Athenians, there was the question as to whether extreme income distribution wealth disparities were not compatible with a functioning democracy. And if they were, what sort of democracies could you have? Could you design constitutions that would somehow contain that? That’s a separate question which economists don’t typically think about very much.

James ROBINSON: What we know about the history of human society is, for at least 4,000 years, we’ve grappled with the same types of problems.

That’s James Robinson, a political scientist and economist at the University of Chicago.

ROBINSON: If you go back to The Epic of Gilgamesh — I think the first version of that is about 2100 B.C. — it’s all about the same thing: how can you create authority, hierarchy — which is very important for providing public goods — cooperation, protection against attack, etc.; but control hierarchy? The problems starting a new society would be: how do we create this system of authority? How do we keep it under control?

ROBINSON … propose a simple way to think about why some societies are successful economically and other societies are not. At some level, economists understand very well what that involves. It involves innovation, it involves investment in education and capital or entrepreneurship. I don’t need to tell anyone associated with Freakonomics this: human beings respond to incentives. But the incentive systems in different societies are very different because of their institutions. The institutions that create all this prosperity and innovation in the United States are absent in other parts of the world. The reason for that is fundamentally political. You need to have the right sort of politics and political institutions if you’re going to create economic institutions or create broad-based incentives and opportunities and create prosperity.

That’s probably not very surprising to hear: it’s hard to build a good economic infrastructure without a good political infrastructure. But Robinson, digging deep into economic history, did find some surprises.

ROBINSON: There’s some interesting lessons from the colonial experience.

Tyler COWEN: Whereas, say, the Spanish colonies were more likely based on the idea of extracting wealth from other people, or taking a lot of the resources out of the ground and not investing as much in human capital.

That’s Tyler Cowen, an economist at George Mason University. English colonization, he says, had another advantage.

COWEN: They had better laws and somewhat less corruption. More of a common-law tradition. They’re more likely to have an independent judiciary.

As Cowen and Robinson see it, the North American colonies flourished because their institutions placed a high value on human capital — their settlers, that is — rather than the exploitation of a native population. And, the argument goes, that difference still persists. Which would explain why there’s still such intense political friction in much of Latin and South America between the elites and the underclass. The U.S., of course, had its own history of slavery in the South; interestingly, Robinson points to the greater poverty in the South as further support of his argument against an economic system that’s built on exploitation. The days of wholesale colonization are, of course, long gone — at least for now. But if we’re considering a more perfect economy for Earth 2.0, surely be wise to think about the lessons learned from these early colonizations and to look for modern parallels. For instance: a company isn’t a country. But how a company treats its employees, its partners, its customers — well, that must have some bearing on how an economy develops.

KANTER: Multinational corporations have a very important role to play in developing countries.

Rosabeth Moss Kanter again, from the Harvard Business School.

KANTER: There are some certainly that exploit, and it depends on the industry.When the only reason companies would go to developing countries was for the natural resources — for mining, for oil — then they would extract those natural resources and leave. What did they care about how they treated their employees? But when companies go because they see a business opportunity — there is a market for their goods and services, or a workforce that they could educate to do things to world standards and supply other markets in that region — then they have to treat people differently. They definitely can make a big difference. I remember when Procter & Gamble was building up its business in Egypt. And one of the things P&G did, because their employees all over the world had health insurance, they worked in Egypt to make sure there was a good health insurance scheme in Egypt so they could give it to their employees too. That not only did something great for the employees, it also set a standard for other businesses there. Multinationals that bring in values and bring in best practices from other parts of the world can educate that country and be a very big part of their development.

The key, Kanter says, is to treat people like people and not like physical resources to be plugged into your business model.

KANTER: If you don’t pay attention to the people on the other end of that equation, even if you think you have the power, it doesn’t work. And there are many ways that those without power can rebel. I was just in China with China’s leading global company. They make refrigerators, sell appliances. Very sophisticated company. Their story of how they went from a backwater to a global giant all involves motivating people to get involved by treating them as though their ideas matter. That was communist China winning in capitalism by empowering people to start businesses off the company platform, to provide ideas, to care about high quality.

ROBINSON … if you’re going to set up a society on a new planet, you don’t want to have the government running itself off the labor of robots or mining rents. You have to set up an economy where everybody is needed, everybody is valued. That’s a big lesson from these successful experiences.

“An economy where everybody is needed, where everybody is valued.” How do you do that, especially as new technologies make so many old jobs obsolete?

CAPLAN: You say, “Driverless cars — isn’t that going to threaten the jobs of drivers?” Yeah! Totally threatens the jobs [of] drivers, and we totally want driverless cars right here, right now, to be awesome, because it will enrich mankind.

That’s coming up after the break. Also, one quick thing: WNYC, the public-radio station that produces Freakonomics Radio, would like you to take a survey about the podcasts you listen to. It’s anonymous and it’ll take just five or ten minutes. Go to WNYC.podcastingsurvey.com — you can also find the link in the show notes for this episode at the bottom of this page.

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If you want to think about building the perfect economic system, there are so many elements to consider. Money, for instance. What is the optimal form of money?

SURI: Mobile money is the ability to use your cell phone to store and transfer money to other people, person to person.

But Suri, and others, have found it can provide large advantages, especially for low-income people.

SURI: The biggest two findings are that mobile money improves financial resilience, which is the ability to deal with bad events. Basically, we find that it has an effect on poverty; it’s going to reduce poverty. We sort of do a back of the envelope to show it reduced poverty by about two percentage points in Kenya, which is about 190,000 households. And that some of these effects are coming from women moving occupation out of agriculture into you know what we call retail slash business. And we see your financial investments become better. You’re saving more because you have the ability to save in your phone, and so people are able to do these things.

If you want to hear more on this topic, check out an earlier Freakonomics Radio podcast called “Why Are We Still Using Cash?” Another basic question to consider if we’re building a new, better economic system: taxation.

That’s Alice Rivlin, an economist who’s had big jobs at the Federal Reserve and the Office of Management and Budget.

RIVLIN: The main problem is that we exempt so many things from income taxation that we end up taxing only a small part of income. But that means that to raise revenue we have to have high rates. There is a pretty broad consensus certainly among economists, but also among politicians that it would be good if we could have a broader definition of income tax on all income, not make exemptions for this and exceptions for that. Then we could have lower rates, and lower rates contribute to higher economic activity.

RIVLIN: The problem is that there are major-vested interests in the things that we exempt. For instance, health benefits that you get from your employer are not taxed, they’re not part of your income. In the world of big corporations, the tendency is to give very rich, elaborate health benefits in place of increasing wages because the tax system skews it that way. We also have very big benefits for borrowing on your house. The so-called mortgage deduction that is very valuable, especially to people who have high incomes and very large mortgages. We don’t need to encourage high-end housing. It would be much better to convert that deduction for mortgage interest to a credit and that would mean that everybody would get the same amount of credit against their mortgage. There’s quite a lot of bipartisan consensus on what to do about it. But we haven’t done it because we aren’t willing to sit down and do the hard work of hammering it out.

But of all the elements to consider when conceiving a more perfect economy, perhaps none is larger, and more pressing, than the future of work.

The most susceptible jobs tend to be lower-paying jobs, which means that lower-income workers, who are already doing worse than average, will be put at even greater risk. That, at least, is how some people see the future of work.

Erik Olin WRIGHT: My name is Erik Olin Wright. I’m a professor of sociology at the University of Wisconsin, where I have taught since 1976.

Whether it’s because he’s a sociologist, or because his worldview has been informed by Marxism, Wright has a different view than most economists about the worst economic problems.

WRIGHT: Among the most glaring is the concentrations of power that come along with the concentrations of wealth that are characterized by a global economic system with gigantic corporations that are able to amass vast sums of money, capital … It’s not simply that this enables them to act in markets in a particularly destructive way sometimes, but it enables them to wield power outside of markets as well. If you took the top ten corporations in the United States and called them a country, they would be roughly the eighth wealthiest country in the world. Our corporations are political entities. I think of that as a huge failure because of the way in which it dramatically undercuts democratic values and egalitarian values.

What kind of solution would Wright propose?

WRIGHT: If we had social policies in place that distributed the gains from trade in a broadly egalitarian manner, I don’t think people would be in favor of protectionism at all. They would see that international trade has broad benefits, not narrow benefits.

What kind of social policies is Wright talking about?

WRIGHT: An unconditional basic income, which you could pay for out of the gains from trade. Right?

We’ve also looked at this topic before on Freakonomics Radio: the episode was called “Is the World Ready for a Guaranteed Basic Income?” That was only a year ago, but since then, interest in the idea has been cascading. Erik Olin Wright sees it as win-win:

WRIGHT: Let’s use a significant part of that increased wealth of the society generated by the economist’s favorite — free trade — and provide an unconditional basic income for everybody. My view is an unconditional basic income should be pegged a bit above the poverty line. Think of it as [a] no-frills but decent standard of living. It gives people a different freedom from what they have in a ordinary capitalist market. It lowers the coercive pressure on people to work, but it doesn’t reduce the incentive. If you work, you earn more income. It’s true there’ll be some people who will be perfectly happy to live just on the basic income, but there’s no disincentive to earn more. It’s not like means-tested poverty grants, where, if you start earning money, you lose your welfare. You don’t lose your basic income. Everybody gets the basic income. Bill Gates gets the basic income.

CAPLAN: Saying, “Let’s give everybody free money no matter what. People perfectly able-bodied. People perfectly able to take care of themselves.” That seems crazy at the outset. But more importantly, if you do a small amount of math and realize how much would it cost, the cost is enormous. Right now, the welfare state — we’re able to keep the cost down because we don’t give money to everybody.

Caplan, as you’ve probably deduced, leans more libertarian than Marxist. And his argument isn’t only mathematical.

CAPLAN: I am old-fashioned enough to like the distinction between the deserving and the undeserving poor. Right now, we have a lot of very expensive government programs that give money to everybody eventually. Old-age programs. Social Security writes checks to Bill Gates like anybody else. Again, to me, this is insane! Why tax everybody to pay for them in a situation that everybody knows they’ll eventually reach, as long as they don’t die young? Thinking about kids and the elderly in the same breath is crazy. You’re born an orphan and there’s nothing you could have done about that. That’s totally not your fault. But if you are starving when you’re elderly, then there’s a question: why didn’t you plan for this, which was totally foreseeable in every way?

You may not be surprised to learn that Caplan also has a different view of the labor markets generally. For starters, he’s in favor of more immigration and more open borders.

CAPLAN: Why trap perfectly good talent in Haiti or Congo or India — or wherever it happens to be born — when it can do so much more in another part of the world, enriching not only the immigrants, which is what we usually focus on, but enriching the world by producing more stuff. Whenever I’m talking to undergraduates, I always say, “First rule of economics: keep your eye on production. If you produce a ton of stuff, mankind will be rich. If you produce a small amount of stuff, mankind will be poor.” Any time you’re trying to analyze a complex problem, forget all the other stuff at first and just say, “What does this do to the productivity of mankind?” If it’s higher, then this is a good thing that we should be rooting for. If it’s lower, it’s a bad thing that we should not be rooting for.

But what if the production of all that stuff comes at the expense of the people who, historically, have made that stuff? What if entire classes of work are swept away by technology? Driverless vehicles, for instance. In the U.S. alone, a few million people make their living as drivers.

CAPLAN: You say, “ Driverless cars, isn’t that going to threaten the jobs of drivers?” Yeah! Totally threatens the jobs [of] drivers, and we totally want driverless cars right here, right now to be awesome, because it will enrich mankind. If you sit around thinking about the few people who lose from progress, rather than all the people gain, you’ll never get anywhere. We would be back in the Stone Age if every time someone came up with an idea we sat around saying, “Whose job be lost as a result of this?” That’s just the kind of thought that needs to be suppressed because it leads to a world of poverty and misery.

Caplan may sound a bit more doctrinaire than most economists you’re used to hearing. But when it comes to relationship between prosperity and technology and the future of work, most of the economists we spoke with for this Earth 2.0 thought experiment were roughly in agreement. Especially about the idea of a universal basic income.

RIVLIN: I’m not one who would move in that direction.

Alice Rivlin again.

RIVLIN: We’ve got to get people working and producing and being valuable rather than just subsidizing people not to work.

It’s not that Rivlin thinks that old-style manufacturing jobs will come back.

RIVLIN: It’s not likely because technology has changed so rapidly and it is more efficient to produce a lot of things with more technology or over in different places.

But, she says, there’s an opportunity to be had.

RIVLIN: What we should be focusing on is the people that we need in a service economy to do important jobs for improving our quality of life. One is very well-trained people to work with small children. Early childhood nurturing and education, we know now, is really really important. Yet we are not paying a living wage to people who take care of children in daycare centers and in early childhood education. We should find a way to professionalize those jobs. Recruit people who have had more training and who can earn higher wages. There are lots of other examples of that in health care, in care for the elderly. We have an awful lot of people now who are living for a very long time and many of whom need care. They don’t need warehousing in a nursing home. They need interesting things to do and be part of a caring atmosphere. That takes people with skill and it takes people that are paid enough. We haven’t figured out how to make these human-service jobs into important parts of our economy that are well compensated. That’s a big challenge.

SACHS: One of my ethical precepts is that everybody should be carried along, broadly speaking. In other words, if we’re rich, we don’t have to have people suffer.

That’s Jeff Sachs. He is one of the most decorated economists of the past half-century. He’s worked with the U.N., with the Vatican, with countries all over the world, mostly on fighting poverty.

SACHS: The fact that we can’t figure that out is a failing of our moral insight, not a failing of economic technique per se. If jobs are going away, we should organize society to help enjoy creative and leisure time. Not cling to having to have a 40-hour work week.

Does that mean Sach’s is in favor of a universal basic income?

SACHS: It’s funny. I am in favor of a universal basic dignity, universal basic needs, universal health care, universal education. The pure cash transfer approach, I find a little naïve, though I can see some role for it. I think that the way we meet basic needs, to an important extent, should not be cash transfers but should be by helping everybody to be incorporated into the decent systems which give people their health, their education, and their dignity.

So what would Sachs do it we made him chief economist of Earth 2.0?

SACHS:You don’t want to really create Earth 2.0 in the way that you’ve stated because we’re likely to make a disaster that way. But what is extremely important is to have a historical and a moral view. A historical view says that societies change. They mainly change because of technological changes. Institutions change as technologies change. We do things differently, we live our lives differently. Instead of working in the fields, we work in factories; instead of working in factories, the robots work in factories [and] we work in services. That’s where history comes in. Then values come in by saying that we don’t just view ourselves as an open, unguided evolutionary process. There are some parts of economics, like Austrian economics, [that] will say, “An economic system is just an open self-organizing evolving system, full stop.” But I think that that’s where the moral framework comes in, to ask, “As technology changes, as we can do things differently, or do do things differently, how should we adjust as a social animal, living in a society for a decent, ethical world in which we should all be striving to be good people?”

To that end, Sachs argues, there are some basic economic considerations to think about …

SACHS: We’re phenomenally rich. It’s unbelievable. We, therefore, have solved — in the macro average sense — what John Maynard Keynes called the “economic problem.” We don’t need extreme poverty. We don’t need suffering from deprivation anywhere in our world. It wouldn’t take almost lifting a finger to make sure that everybody has access to basic health and education in this world, because we’re so good, we’re so rich, our technologies are so smart. One compelling fact for me is that nearly six million kids under the age of five dying each year because they don’t get the vaccine or they don’t get the antibiotic. [That] is just absurd, and I would say obscene. That’s one compelling fact …

DUBNER: That’s one compelling fact. But you’re also saying that’s part of what we don’t want to throw away — because economics, to a degree, is what helped us achieve that wealth. You don’t want to throw out that baby with the bathwater, correct?

SACHS: You better believe it. That’s why globalization is important thing. That’s why technology is an important thing. Some people say, “Look at all the downsides of technology.” They’re incredibly naive because, first of all, we got 7.5 billion people on the planet and to keep people fed, with safe water, and basic access to modern energy services day by day without utter catastrophe requires a complexity and sophistication that is beyond the awareness of almost everybody on the planet.

The artificial intelligence, robotics revolution, the digital age in general is the third point. Right now, we’re living through our own phenomenal industrial revolution. What you learn from economic history and from eyes open is that this is reshaping our lives. We’ll do a huge amount of good for the world if we combine it with the moral framework. In the particular case of robotics and automation, it has to dawn on a lot of people that it’s going to eat up a lot of jobs. I expect my economics job is going to go the way of most other jobs because smart Watson is going to be able to read the economics journals, make the key words and do the Bayesian upgraded probabilistic analyses better than a macroeconomist and probably pretty soon. But what is going to happen is that if you’re not watching a lot of people are going to be left behind. A debate — that says, “Computers are good, robots are bad” — is obviously the dumb, naive debate we generally have. They’re good in certain ways, but they have side effects that should be handled.

If we think together in our best mode as human beings, in the mode of problem-solving, these are really solvable problems. I love to bring the universities, the businesses, civil society, and government together. The nerdy term is multi-stakeholder. That’s U.N. jargon, but I am a believer that we can do better. I’m a believer that [we] can be deliberate. I’m a believer in expertise. I want to put in a good word for experts, because when you live in systems there are engineers who understand the systems and then there are the rest of us who don’t understand them at all but depend on them and live on them. Experts can become self-interested and corrupt and so forth. But the anti-expert view is unbelievably dangerous. We live in a world of such sophisticated systems that your eye and basically everyone on the planet could barely say how our phones or computers or almost anything else actually works. Thank God there are people that know how it works.

Let’s get some shared goals. Let’s have them meet the morality and the ethics test. That’s decent society. Let’s create ways that knowledge and fairness and accountability can really be brought to the table. Let’s plan.

Okay, let’s. Thanks for listening to our first couple installments of Earth 2.0. We’ll follow up with more episodes in the coming months. Let us know what you want to hear about. You can drop us a line at radio@freakonomics.com or hit us up on Twitter or Facebook. Coming up next week on Freakonomics Radio:

Robert LUSTIG: Let’s do a little quiz. Can you name a substance that is caloric — that is, it contains calories — but is not nutrition; that there is no biochemical reaction in the body that requires it; that when consumed in excess causes cellular, organ system, human damage and death; and we love it, and it’s addictive?

BOY: I tried to give it up once, but it didn’t work out at all, because I’m addicted to sugar. I can’t help it.

There’s a war on sugar, if you haven’t heard. Is it justified? That’s next time, on Freakonomics Radio.

Alice Rivlin, senior fellow in the economic studies program and director of greater Washington research at the Brookings Institution; visiting professor at the McCourt School of Public Policy at Georgetown University.